An Independent Review of the Franchising Code of Conduct reveals more than 20 formal recommendations. Here is what you need to know.

Key points:

• On 15 August 2023 the Minister for Small Business the Hon Julie Collins MP issued terms of reference appointing Dr Michael Schaper to conduct an independent review of the Franchising Code of Conduct (the Independent Review).
• Dr Schaper was required to provide a written report of his findings and recommendations by the end of December 2023. The report was required to be tabled in Parliament early this year.
• Dr Schaper’s report (the Report) was tabled on Thursday, 8th February 2024, in Parliament and is now publicly available.
• The Government is yet to formally respond to the Report.

Independent review

Dr Schaper was engaged to conduct an independent review of the Franchising Code of Conduct (Franchising Code).  The scope of the review was set out in the Report and included whether the existing Franchising Code was fit for purpose as well as investigating the effectiveness of earlier reforms.

A copy of the Report can be accessed here.

Findings, Recommendations and suggestions

The Report makes 25 Findings, 23 formal recommendations as well as 34 implementation suggestions. It also contains a list of recommended drafting issues to be considered if the Franchising Code is remade.

Findings

Some of the more important findings set out in the Report include that:

1. The Franchising Code is generally fit for purpose (importantly this is despite the ACCC submitting that they do not believe that it is fit for purpose).
2. Part 5 of the Franchising Code relating to new vehicles dealerships is operating as intended and not producing any unintended consequences.
3. The sector is suffering from review fatigue and needs respite from a constant process of review.
4. Any further attempt to address concerns by mandating greater disclosure is likely to be counterproductive.
5. Disclosure and cooling off in respect to renewal of an existing franchise create an unnecessary burden.
6. Enhancements to education and advice by Government would be helpful.
7. All franchise agreements should provide a franchisee with a reasonable opportunity to make a return on investment (including compensation for early termination).
8. Awareness and utilisation of the Franchise Disclosure Register is low and greater enforcement of the listing requirements is likely to be needed.
9. Decisions of the Courts in relation to good faith should be used by Government to develop education as to the limitations of good faith in a dispute.
10. Change management remains problematic in many franchise relationships and a cause for dispute.
11. Some franchisors are not employing best practice relating to transparent and effective operation of marketing and cooperative funds.
12. Amendments in 2021 delaying special circumstance immediate termination rights have made it unacceptably difficult for franchisors to act decisively in the context of serious breaches.
13. There needs to be more awareness and clarity about the process and circumstances in which a franchisee can negotiate an early exit by franchisees.
14. The misunderstanding of goodwill in franchising continues to be a cause of disputes. The goodwill issues are driven by concerns relating to adequate compensation uncertainty and the opportunity to make a return on investment.
15. Restraints of trade are unduly limiting franchisee opportunities at the end of a franchise relationship. They may be difficult to enforce but they may unduly inhibit and dissuade competition in the sector.
16. The existing approach to online education and advice resources for the sector is not optimal and the spread of resources across agencies such as the ACCC, ASBFEO and Treasury increases search costs.
17. Code compliance would be enhanced by increasing the number of civil penalty provisions and the capacity to issue infringement notices.
18. It would be beneficial for Government to consider the merits and feasibility of a shift to an ex-ante licensing regime prior to the next review of the Franchising Code.

Recommendations

The recommendations set out in the Report include that:

1. The Commonwealth Government should ensure it provides more comprehensive robust statistics about the franchising sector.
2. The Franchising Code (which is due to sunset in April 2025) should be remade, largely in its current format.
3. A clearer statement of purpose should be inserted to the Franchising Code.
4. Service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Franchising Code.
5. Reviews of the Franchising Code should be conducted in 5 yearly cycles in the future.
6. Simplify and consolidate pre-entry information given to franchisees.
7. Franchisor obligations under the Franchising Code in relation to existing franchisees should be simplified (e.g. allow an opt out of disclosure or cooling off on a renewal or extension).
8. The requirement that new vehicle dealership agreement must provide a reasonable opportunity to make a return on investment should be extended to all franchise agreements (clause 46B)
9. The requirement that new vehicle dealership agreement must include provisions for compensation for franchisees in the event of early termination should be extended to all franchise agreements (clause 46A).
10. Enhance the public visibility and usage of the Franchise Disclosure Register (FDR).
11. Require additional information to be included on the FDR relating to dispute resolution and adverse actions brought by enforcement agencies.
12. Encourage franchisors (through education) to consult franchisees regarding changes to the business model during the term.
13. The provisions relating to termination for serious breaches should be simplified and changes made to clause 29 revisited. This includes strengthening the right of a franchisor to terminate immediately if adequate compensation is paid.
14. Best practice guidance should be developed and give to franchisors and franchisees regarding early exit to enhance effectiveness of Clause 26B.
15. Further work should be done to limit the use of unreasonable restraints of trade in franchise agreements including getting the ACCC to issue guidance on when a restraint may be an unfair contract term.
16. Government should develop a comprehensive online resource in the nature of ASIC’s Money Smart website.
17. Government agencies should work with the sector to improved standards of conduct by developing best practice guidance and education.
18. ASBFEO should be given additional powers to name and shame parties who do not participate meaningfully in the ADR process.
19. Government should assist franchisees to access low-cost legal advice on prospects prior to any formal ADR Process.
20. Government should consider whether ASBFEO should be given a right to be a designated complainant for franchise disputes being referred to the ACCC.
21. Franchisees should be able to seek a ‘no adverse costs’ order when bringing a matter against a franchisor for breach of the Franchise Code or ACL.
22. The scope of penalties and associated investigative powers and infringement notice regime in Part IVB of the CCA should be increased.
23. Government should investigate the feasibility of introducing a licencing regime to better regulate most aspects of the franchisor-franchisee relationship.

What next

It will no doubt take time for the Minister to consider the Report and formally respond to the Report and take steps to implement some or all of these recommendations. The current Franchising Code is due to sunset on April 2025. As a consequence, a new regulation prescribing a new code will need to be made before then.

The recommendation by Dr Schaper is that it be remade but taking into account a number of technical amendments identified in his Report. It is unlikely that a licensing based regime (which was suggested by the ACCC in its submission) will be able to be implemented before the sunset date and is likely to be an issue for further consideration by Government in future reviews.

This article was written by Derek Sutherland, Consulting Principal, Keypoint Law.